June 23, 2012
20 Observations on the New Mortgage Rules
Three months ago, Finance Minister Jim Flaherty told banks to tighten lending on their own. Now he’s doing it for them.The Department of Finance (DoF), in concert with OSFI, released a buffet of mortgage rules Thursday. By our count, there are eight salient changes that, when combined, will have a measurable impact on housing.
See: New Mortgage Rules and OSFI Guidelines [B-20] for rule summaries.The motivation for these moves is captured in Flaherty's press briefing comment: "I have been listening to the market, and quite frankly I don't like what I hear.” Loose translation: The debt and housing train is in danger of running off the rails.
The DoF's solutions to this problem will influence our market for years to come. Below are 20 musings on the new mortgage rules, sprinkled with a few tips and predictions:
1. Hurried Implementation:
The government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.
Because of this, and because banks like to appear prudent to regulators, there's a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.
2. The Stampede:
Seemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortization or 85% loan-to-value (LTV) refi should be warned:
If you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.
4. Side-Effects:
Shorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flaherty says: “Good. I consider that desirable.”
Canada's 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.
Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.
On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.
Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.
The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won't be.
Flaherty states that "less than five per cent of new home purchasers" will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP's 2012 housing starts estimates).
If Vegas made an over/under line on that 5% figure, we’d bet the “over.”
In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.
On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.
5. The Amortization Effect:
Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.
Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.
According to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty's point, of course.)
TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.
Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”
6. Market Stability:
Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. "Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.
The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoF calls that risk “manageable,” however.
Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)
Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it's more like stopping short than a little tap.
source: Canadian Mortgage Trends
The government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.Because of this, and because banks like to appear prudent to regulators, there's a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.
2. The Stampede:
Seemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortization or 85% loan-to-value (LTV) refi should be warned:- Underwriting during the interim period (June 21-July 8) may be especially vigilant, in an effort to weed out the marginal borrowers who spring from the woodwork
- For the next three weeks, the lenders with the best rates, or those that are less efficient or less staffed, could have abnormal underwriting delays (keep that in mind if you have financing condition deadlines)
- In most cases, mortgage rule changes are not a reason to rush a home purchase.
If you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.4. Side-Effects:
Shorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flaherty says: “Good. I consider that desirable.”Canada's 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.
Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.
On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.
Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.
The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won't be.
Flaherty states that "less than five per cent of new home purchasers" will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP's 2012 housing starts estimates).
If Vegas made an over/under line on that 5% figure, we’d bet the “over.”
In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.
On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.
5. The Amortization Effect:
Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.
Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.
According to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty's point, of course.)TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.
Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”
6. Market Stability:
Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. "Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.
The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoF calls that risk “manageable,” however.
Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)
Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it's more like stopping short than a little tap.
source: Canadian Mortgage Trends
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